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2 TABLE OF CONTENTS EXECUTIVE SUMMARY... i I. INTRODUCTION... 1 II. A HISTORY OF INSTABILITY... 2 A. POLITICS...2 B. THE ECONOMY...6 C. RELATIONS WITH PERU AND COLOMBIA...12 III. THE CORREA ADMINISTRATION A. THE 2006 ELECTIONS...14 B. THE NEW GOVERNMENT S PEOPLE AND PROGRAM...15 C. POLITICAL STRUGGLE AND THE CONSTITUENT ASSEMBLY Applying shock therapy The push for the Constituent Assembly The Constituent Assembly...22 IV. CHALLENGES AND RISKS V. CONCLUSION APPENDICES A. MAP OF ECUADOR...26 B. GLOSSARY OF ACRONYMS...27 C. ECUADOR S REAL PER CAPITA GDP AND A MEASURE OF THE OIL PRICE USING THE U.S IMPORTED REFINER S COST D. ABOUT THE INTERNATIONAL CRISIS GROUP...29 E. INTERNATIONAL CRISIS GROUP REPORTS AND BRIEFINGS ON LATIN AMERICA/CARIBBEAN...30 F. INTERNATIONAL CRISIS GROUP BOARD MEMBERS...31

3 Latin America Report N 22 7 August 2007 ECUADOR: OVERCOMING INSTABILITY? EXECUTIVE SUMMARY Ecuador has been Latin America s most unstable democracy for a decade. Starting with the ousting of President Abdalá Bucaram by Congress and street protests in 1997, weak, temporary governments have been the rule. In 2000, Jamil Mahuad was toppled by a civilian-military coup, and in 2005, protests brought down Lucio Gutiérrez, who had helped oust Mahuad. The government of Rafael Correa of the Alianza País (AP) movement, who took office in January and enjoys record-high approval ratings, is applying shock therapy to overwhelm the discredited opposition and pave the way for a constituent assembly (CA) intended to produce profound, radical and fast change. This triggered one of the sharpest clashes between branches of government since the return to democracy in 1979, including the Electoral Court s firing of 57 opposition members of Congress in March, accompanied by street violence. To restore stability to the troubled country, Correa will need to pay more attention to upholding the rule of law, ensuring a level CA playing field and building consensus for fundamental reforms. Chronic instability has been linked to progressive undermining of the rule of law. Veto power of powerful economic groups and the parties in Congress and the judiciary has been strengthened, as has the street power of social movements, in particular indigenous organisations, but lately also sectors of the middle and upper-middle class in large cities, especially Quito. The military retains its behind-the-scenes influence but may be more reluctant to intervene directly than in the past unless collapse of public order is imminent. While the economic and banking crisis of the late 1990s, central to Mahuad s fall, was patched over by introducing the dollar as the official currency in 2000, and economic growth is steady, there are sustainability questions. If oil prices fall, the uncertain investment environment and declining production of state-owned PetroEcuador could bring back economic stagnation. Correa is focused on fighting the opposition and making the CA happen. It is uncertain whether he could build the necessary consensus to steer Ecuador out of crisis, especially in the face of hostility from the elites. Instability s roots trace back to the institutional framework established during the return to democracy and the foreign debt accumulated at the start of the oil boom in the 1970s. Since then, lack of stable congressional majorities and the exclusion of important segments of society, in particular the indigenous, have prevented long-term planning, and an effective attack on corruption, patronage politics and rent-seeking attitudes fostered by oil wealth. In , interim President Fabián Alarcón tried to restore governability with a new constitution. He failed, and it is at least questionable whether Correa s plan to introduce sweeping reforms by a new constitution will fare better. History shows Ecuador s problems cannot be solved solely by constitutional engineering and that the intransigent elites and traditional parties will do everything in their power to protect their privileges. If he is to succeed, Correa will need to: uphold the rule of law and guarantee the separation of powers; prepare the CA election with full transparency and guarantees for the opposition; seek consensus with the opposition on key points of the new constitutional framework to be elaborated by the CA, including economic reforms; advance institutionalisation and democratisation of Alianza País and the social and political movements; and elaborate, with broad citizen participation, an economically viable National Development Plan Bogotá/Brussels, 7 August 2007

4 Latin America Report N 22 7 August 2007 ECUADOR: OVERCOMING INSTABILITY? I. INTRODUCTION President Rafael Correa, who was elected in November 2006 and sworn in on 15 January 2007, has promised to bring rapid, radical and profound change to Ecuador. That is undoubtedly needed in a country which during the past decade has been Latin America s most unstable democracy. Since 1996, it has had eight presidents, three of whom were ousted by Congress and street protest. The rule of law has been progressively weakened and despite extensive reform efforts, such as a new constitution in 1998, the political system has become largely dysfunctional. In addition, Ecuador experienced one of the continent s worst economic crises, with hyperinflation and the breakdown of its banking sector in This background report examines the roots of the instability and the new government s first steps to bring about far-reaching political and socio-economic change. Correa, a young economist who until briefly economy minister in the Alfredo Palacio administration ( ) was basically a political unknown, came to power with the support of a political movement begun by left-wing intellectuals after President Lucio Gutiérrez was ousted in April His government sees itself as the avant-garde of a citizen revolution promising to bury the ills of the old system. These include the veto power in Congress of traditional parties which, polls indicate, a majority of Ecuadorians see as corrupt, politicisation of key state institutions, including the judiciary and Electoral Court, pervasive social inequality and poverty and the elite s sell-out to foreign interests. A pledge to hold a constituent assembly (CA) to prepare a new constitution was at the heart of Correa s campaign; its creation was overwhelmingly endorsed by referendum on 15 April 2007 and is now at the centre of government policy. He was toppled by Congress and street protest after not even a year in office. Two successors, Jamil Mahuad and Lucio Gutiérrez, were also ousted, the first by a civilian-military coup during an economic crisis, the second amid Quito street protests after he took over the Supreme Court in Ecuador struggled even earlier to make democracy peacefully resumed in 1979 work. The absence of stable majorities in Congress contributed to the lack of longer-term policy planning, while insufficient representation of particularly the large indigenous minority prompted growing street opposition. During his first six months, Correa has faced opposition in Congress, the judiciary, the Electoral Tribunal (TSE) and state institutions. Both sides have resorted to questionable means but the president and his followers have been able to limit their opponents room for manoeuvre, extended control into basically all branches of government and moved forward with the CA. Correa has also denounced critical media, which uncovered dubious political deals. The next step is the election of 130 CA delegates on 30 September. While the campaign officially opens in mid-august, Correa has already begun the effort to ensure a majority for Alianza País, including by generous, if unsustainable, social spending. There are signs, however, that the election may prove more difficult than expected. The battered political opposition has regrouped, and the government has not clearly enunciated either the specific changes it wants in the new constitution or a longer-term political strategy. There is worrying potential for stalemate in the assembly, enfeebled governance and a new round of instability. Correa s record-high approval ratings reflect both trust in his administration s ability to overhaul Ecuador s institutions and cater to bread and butter demands and deep frustration with the incapacity, corruption and unconstitutional behaviour of previous governments and Congress, in particular since the mid-1990s. Starting with the election of Abdalá Bucaram in 1996, things moved from bad to worse.

5 Crisis Group Latin America Report N 22, 7 August 2007 Page 2 II. A HISTORY OF INSTABILITY 1988), Rodrigo Borja ( ) and Sixto Durán ( ) all completed their terms. 6 A. POLITICS In 1997, 2000 and 2005, Presidents Abdalá Bucaram, Jamil Mahuad and Lucio Gutiérrez were ousted by Congress amid strong popular protests, and with the acquiescence of the armed forces. 1 While there are historic precedents for such political instability, in particular in the first half of the twentieth century, 2 Ecuador was also the first of a series of Latin American countries to transition peacefully from military to democratic rule in more recent times. The transition from the three-member military junta, which took office after toppling General Guillermo Rodríguez in 1976, to the elected government of Jaime Roldós in 1979 is widely acknowledged as a model for peaceful reestablishment of representative government based on a pact between military and civilian elites. 3 The two core elements of the pact, based on the Plan for the Juridical Restructuring of the State (Plan de Reestructuración Jurídica del Estado), were the 1978 constitution and the law on elections and political parties. The chronic instability that started in the mid-1990s 4 was preceded by seventeen years of relative stability during which five presidents Jaime Roldós ( ), 5 Oswaldo Hurtado ( ), León Febres-Cordero (1984- Several factors, political as well as economic, help explain the instability. The 1978 constitution, which institutionalised liberal democracy while keeping a lid on participation in the political process, was elaborated behind closed doors and not received enthusiastically by Ecuadoreans. 7 Together with the law on elections and political parties, it produced neither satisfactory democratic representation nor stable majorities in Congress. 8 Failure between 1979 and 1996 to implement administrative and economic reforms and overcome rent-seeking and corruption strengthened by the oildependent economy that emerged in the 1970s was in good part due to lack of stable legislative majorities. The traditional parties such as the Social Christian (PSC) and Democratic Left (ID), under a few strongmen (caudillos), pursued clientelistic practices. In the 1980s, as social inequality and poverty persisted, the young democracy was challenged first by big worker protests, then by well-organised, indigenous and social movements. Progressively deeper fissures emerged between Quito and the highlands, on the one hand, and the economic powerhouse Guayaquil and the Pacific provinces on the other. The mid-1990s saw the emergence of anti-system and populist presidents backed by new political parties 9 and the military s re-emergence as political arbiter. 1 In 1997, the military withdrew support from Bucaram during the demonstrations after Congress charged him with mental unfitness. During the January 2000 demonstrations against Mahuad, the military and police refused to enforce order. Alvaro Bello, Etnicidad y ciudadania en America Latina. La acción colectiva de los pueblos indígenas (Santiago de Chile, 2004), p Between 1925 and 1948, Ecuador had 27 administrations. In the 1950s, partly due to banana and cacao booms and subsequent economic development, elected governments finished their terms; but in the 1960s and early 1970s, instability returned. Between 1960 and 1972, only two of seven governments were elected. In 1970, José María Velasco, elected for the fifth time in 1968, proclaimed a dictatorship. He was ousted in 1972, and the military ruled until the transition to democracy. 3 Pablo Andrade, Democracia liberal e inestabilidad política en Ecuador, Oasis, no. 11 (2005). 4 The first clear sign was Congress s impeachment of Vice- President Alberto Dahik in 1995 for corruption. 5 Roldós and his wife died in a plane crash in Vice President Hurtado finished the term. 6 The Roldós-Hurtado government was centre-left; Febres s was centre-right, Borja s social democratic, Durán s centreright. 7 The 1978 constitution was written by three commissions established by the military junta and approved by a referendum in January Crisis Group interviews, political analysts, Quito, 8 and 11 June The 1978 constitution and the law on elections and political parties established that only parties could represent the electorate. They had to have a membership representing at least 1.5 per cent of that electorate and a presence in at least ten of the 22 provinces. Alliances were prohibited, and independent candidates and political movements could not participate in the political process. This made it difficult, for example, for indigenous people to obtain adequate representation. Simón Pachano, La trama de Penélope (Quito, 2006); Alexandra Vela Puga, Regulación jurídica de los partidos políticos en Ecuador, in Daniel Zovatto, Regulación juridica de los partidos politicos en América Latina (Mexico, D.F., 2006), pp ; Constitución política de Ecuador, 15 January The Partido Roldosista Ecuatoriano (PRE), the Partido Renovador Institucional de Acción Nacional (PRIAN), the indigenous Patachkutik party, and, more recently, the Partido Sociedad Patriótica (PSP) of Lucio Gutiérrez.

6 Crisis Group Latin America Report N 22, 7 August 2007 Page 3 As the rule of law was weakened, unconstitutional actions became common. Starting with the ousting of President Bucaram in 1997, Congress assumed a prominent role in making and breaking governments. Serious economic difficulties, coming to the fore with the boom-bust oilprice cycle and mounting foreign debt since the early 1980s, the breakdown of the banking sector and hyperinflation in the late 1990s, and government plans to adopt the dollar as the official currency contributed to the crisis. 10 In 1996, Bucaram of the populist Ecuadorian Roldosista party (PRE) won the second round of the presidential elections with 54.4 per cent of the vote against Jaime Nebot of the PSC. 11 In the first round, he projected himself as the anti-establishment candidate, appealing above all to the poor and social movements as a catalyst for change. Despite a strong presence in the coastal provinces, 12 his party lacked national reach, forcing him to seek allies in the run-off. These included the indigenous movement, 13 to which he promised a constituent assembly and creation of a ministry for indigenous affairs in order to express the multiethnic nature of the Ecuadorian nation. 14 In power, however, Bucaram s efforts to conciliate two of his harshest critics, former President and Guayaquil Mayor Leon Febres-Cordero (PSC) and Quito Mayor Jamil Mahuad (Unión Democrata Cristiana, or UDC), failed. 15 His economic policy, which aimed at pegging the sucre to the dollar and introducing fiscal austerity through reduction of state 10 Political-institutional instability continued during the presidency of Lucio Gutierrez in spite of economic stabilisation following introduction of the dollar as national currency. See Section II.B below. 11 The PRE emerged in 1983 as a spin-off of President Jaime Roldos s Concentración de Fuerzas Populares (CFP) party. In 1988, it obtained 16.3 per cent of seats in Congress. In 1992 it fell back slightly to 16 per cent but then obtained 23.2 per cent in La trama de Penélope, op. cit., p In 1996, the PRE obtained only 8 per cent of its votes in the Andean province of Pichincha, but 35 per cent in Guayas province. Ibid, p CONAIE, the umbrella organisation of indigenous movements, was started in 1986, the indigenous Pachakutik party in Acta del acuerdo entre las organizaciones indígenas - CONAIE, FEINE, FENACLE- y el binomio presidencial Abdalá Bucaram-Rosalía Arteaga, Quito, 2 July On 5 September 1996, Bucaram told Mahuad he would support his initiative to build a trolley-bus public transport system in Quito. The next day he met with Febres-Cordero, whom he had ridiculed during his campaign, to discuss Guayaquil s problems. Alberto Acosta, Ecuador. El Bucaranismo en el Poder, Revista Nueva Sociedad, no. 188, (1996), p. 13. subsidies and privatisation of state-owned enterprises, did not sit well with the labour unions and the middle class. 16 The Confederation of Ecuador s Indigenous Nationalities (CONAIE) opposed his neoliberal platform and was further estranged by the creation of a ministry of ethnicity and culture, whose senior officials represented only a limited sector of the indigenous movement. 17 The establishment resented his constant verbal attacks on the oligarchy and outlandish public appearances. 18 His appointments of members of his extended family and cronies to government posts were criticised, and corruption charges abounded. 19 In January 1997, CONAIE formed the indigenous, trade unions and peasant and women groups into the Patriotic Front (Frente Patriótico). 20 During a large protest march in Quito on 29 January, calls for economic policy change turned into a cry for Bucaram s resignation. The dominant parties in Congress PCS and UDC backed the 3 February national strike called for by the Front and its demands. Instead of impeaching Bucaram, Congress resolved to remove him by simple majority vote on grounds of mental unfitness. 21 The armed forces declared themselves neutral, thereby 16 Bucaram s popularity decreased from 69 per cent at the beginning of his term to 15 per cent in Janaury Opinion pública y realidad nacional: 25 años, problemas que preocupan a la población, CEDATOS, Ecuador Debate, Nº 46 (1999). 17 The nomination as indigenous affairs minister of the CONAIE vice president, Luis Pandam, from the Amazonia, kindled internal tensions between indigenous people from Amazonia and those from the Andes. However, they united soon against Bucaram. Etnicidad y ciudadania en America Latina, op. cit., pp ; José Sánchez-Parga, El Movimiento indígena ecuatoriano (Quito, 2007), pp During the campaign Bucaram alluded to the PSC as choros, a common word for thieves. On 14 August 1996, two days after he was sworn in, he referred to former President Rodrigo Borja as a dunce. On 9 October he released a CD tiltled El Loco que Ama ( The Crazy Man who Loves ), accompanied by Los Iracundos, a Uruguayan rock band. On 16 December, he sang and danced in a televised public benefit. Donations collected during the event were allegedly mismanaged. 19 Notable corruption scandals include: overpricing of Ecuapower stock in its privatisation for more than $63 million, over $61 million in customs tax evaded and the mochila escolar case, which reduced the education budget by over $40 million. 20 The Patriotic Front was formed by the Coordinadora de Movimientos Sociales, the Frente de Nacionalidades Indígenas y Organizaciones Campesinas, the Coordinadora Política de Mujeres, the Frente Ecuatoriano de Derechos Humanos, the Frente Unitario de Trabajadores and the Frente Popular. 21 This was done by bending Article 100 of the constitution.

7 Crisis Group Latin America Report N 22, 7 August 2007 Page 4 giving a green light to dismiss him on questionable constitutional grounds. 22 Equally questionable was Congress appointment of its president, Fabian Alarcón, 23 as interim head of state on 11 February. 24 With Congress in control, Alarcón, who was enmeshed in a corruption scandal, 25 had little room for manoeuvre. During his eighteen-month term, he established an anti-corruption commission and brought about reform of the party law (ley de partidos). In May 1997, he called for a referendum to ratify his interim mandate and establishment of a constituent assembly. 26 The 70 assembly delegates were elected on 30 November and finished the new constitution on 5 June It came into force automatically when Mahuad was sworn in as president two months later. 28 The election of Mahuad, who had served twice as mayor of Quito and was widely considered a talented manager, 29 and the new constitution spurred hope for renewed stability. Mahuad, who had stood as the candidate of a centre-right UDC/PSC coalition, tried to co-opt the indigenous movements, for example by giving their representatives in government institutions responsibility for indigenous issues. 30 But high expectations the new constitution would bring stability because it had increased presidential power were soon undermined by the inherited economic crisis 31 and the destabilising stance adopted by Congress, which sought to regain ground lost to the executive. 32 Mahuad s government was forced to limit itself to conciliating interests. The rivalry between the coast and the highlands was sharpened by the constitutional reform that eliminated national representation in Congress. 33 Economic hardship in coastal Guayas province further promoted regional tensions and prompted the PSC, which was strong in those provinces, to distance itself from the government. 34 As Mahuad lacked a sufficient base to pass essential laws, he governed by decree, implementing tough economic measures that pushed labour unions backed by CONAIE into massive strikes that paralysed the country for ten days in March and twelve in July While he talked with the left-wing ID and indigenous Pachakutik parties to win support in Congress and tame growing popular discontent, the PSC and Guayaquil elites withdrew their support. 35 From August 1998 to late 1999, he tried and failed to form at least five coalitions in Congress. 36 With the economic crisis hitting the lower and middle classes the hardest, 37 the 22 Pablo Biffi, La Crisis en Ecuador: Neutralidad de los Militares, Clarín, 8 February Alarcón belonged to the Frente Radical Alfarista (FRA) party. In 1995 he joined the majority coalition in Congress formed by PSC and PRE and was appointed president of Congress. In 1996 he supported Bucaram in his second round presidential campaign. He was reelected to Congress in May 1996 and reappointed president of that body. 24 Vice President Rosalia Arteaga temporarily took over the presidency from 6 to 11 February. The constitution had no provision for succession in case of permanent absence. Congress used this lack of clarity to appoint Alarcón, as interim president, a title not in the constitution. Pablo Andrade (ed.), Consitucionalismo autoritario: los regímenes contemporáneos en la región andina, (Quito, 2005), p The piponazgo scandal involved misappropriation of funds during his congressional presidency, The referendum approved Alarcón s caretaker government with 68 per cent and Bucaram s removal with 75.7 per cent. 27 Two traditional parties, PSC with 21 and UDC with twelve seats, had the largest representations in the assembly. 28 The 1998 constitution specified it would enter into force the day the new president took office. Constitución política de Ecuador, 5 June Mahuad was elected mayor of Quito twice (1992, 1996) and became a prominent critic of Bucaram. He narrowly defeated Alvaro Noboa of Bucaram s PRE party. 30 The indigenous movement managed the Intercultural Bilingual Education head office, and Mahuad issued presidential decree no. 386 of 11 December 1998, allowing for management of PRODEPINE (Development Project of Ecuador s Indigenous and Black Peoples) and CODENPE (Council of Ecuador s Nations and Peoples) by indigenous representatives. Consitucionalismo autoritario, op. cit., p In 1997, extreme weather conditions caused losses estimated at 13.5 per cent of GDP. Oil prices dropped while the fiscal deficit reached 7 per cent of GDP. The Asian and Russian also crises hurt the financial system, bankrupting 70 per cent of its institutions. See Section II.B. below. Ibid, p. 90. Osvaldo Hurtado, Los costos del populismo, (Quito, 2006), pp Crisis Group interview, Quito, 8 June The 1998 constitution did away with the election of twelve deputies nationally. It retained two deputies for every province and one for every voting district of 200,000 inhabitants. 34 Guayaquil was especially hard hit: added to the losses from floods, the mancha blanca disease reduced shrimp exports 62 per cent between 1999 and 2000; 68 per cent of the coast deposits were in bankrupt banks. Guayaquil s economic and political elites spoke of decentralisation, regional autonomy and even separatism. Los costos del populismo, op. cit., pp Mahuad agreed with the indigenous movements and labour unions to create an indigenous fund, maintain subsidies on utilities and fuels and pass a law reinstating a revenue tax, ibid, pp Consitucionalismo autoritario, op. cit., p In 1999, salaries depreciated by 10.7 per cent; urban unemployment reached 14.4 per cent and underemployment, 56.8 per cent; poverty, 46 per cent and extreme poverty 11.8 per cent. Los costos del populismo, op. cit., p. 82. Social Panorama, 2006, The Economic Commission on Latin

8 Crisis Group Latin America Report N 22, 7 August 2007 Page 5 highly-organised indigenous movement stepped up street protests. On 9 January 2000, Mahuad announced his plan to adopt the U.S. dollar as the official currency. Under CONAIE leadership two days later, the indigenous movements set up a people s parliament that called for his resignation and mobilisation of peasants. On 20 January, protesters surrounded Congress, the Supreme Court and other government institutions. The next day they stormed the Congress building. Young army officers joined the protest, and Colonel Lucio Gutiérrez, along with CONAIE leader Antonio Vargas and former Supreme Court President Carlos Solórzano, formed a Civic-Military Salvation Junta. 38 It closed down Congress and replaced it with the people s parliament, which issued a decree removing Mahuad, who abandoned the presidential palace, Carondelet, when protestors broke in that same day. However, on 22 January the armed forces joint command, under Defence Minister General Carlos Mendoza, refused to recognise the Junta. Congress appointed Vice President Gustavo Noboa 39 as president on the questionable grounds that Mahuad had abandoned his post. Noboa immediately implemented dollarisation and started negotiations with the international financial institutions (IFIs). 40 Finding agreement with the UDC/PSC legislative majority on austerity measures recommended by the IFIs proved difficult. 41 Inflation America and the Caribbean (ECLAC), shows rising poverty to 1999, reaching 63 per cent (31 extreme), declining to 49 per cent in 2002 (22 per cent extreme) and 45 per cent in 2005 (17 per cent extreme). 38 In an interview on 18 May 2001, Gutiérrez said we [the military] joined the indigenous people and the different social sectors in their legitimate claims (Crisis Group translation) and opposed the government s orders to forcefully expel the protestors from Congress. Kintto Lucas, El movimiento indígena y las acrobacias del coronel (Quito, 2003), pp Noboa was not linked to any party. He was a scientist and dean of Guayaquil s Catholic University bodies becoming Mahuad s vice president. 40 See Section II.B below. 41 IMF officials became involved in discussion of the law, cautioning PSC and DP legislators against introducing modifications to favour private interests. On 19 April 2000, the IMF approved Noboa s economic plan, culminating with a $226.7 million loan and negotiation of a twelve-month stand-by arrangement; the Inter American Development Bank (IADB/BID), the World Bank and the Andean Corporation of Development (CAF) committed over $2 billion in additional loans. Between July and September 2000, the government renegotiated its external debt in Brady and Euro bonds, reducing it by $2.5 billion. Los costos del populismo, op. cit., pp though less pronounced than before revived CONAIE-led protests in January In early February, after demonstrations left three protestors dead and a dozen injured, 42 Noboa, CONAIE and other social movements reached an agreement. The government pledged to freeze petrol and household fuel prices, if the budget allowed it, refrain from raising value-added tax (VAT) and allocate more resources to development and social investment projects in the poorest indigenous communities. 43 While the economy eventually started to recover, privatisation of public utilities (electricity and telecommunications) could not be implemented, 44 and Noboa s government ended enmeshed in corruption scandals. 45 Political and institutional instability continued under Gutierrez, who was elected in November The former colonel and coup leader campaigned as the candidate of the new Sociedad Patriótica party (PSP) as an anti-party and anti-oligarchy outsider in alliance with the indigenous Pachakutik party and the 42 Ecuador: el Estado de Emergencia no justifica violaciones de derechos humanos, Amnesty International, 9 February Among other things, Noboa pledged to increase the budget of the Council for the Development of the Nationalities and Peoples of Ecuador (CONDENPE), the National Direction for Intercultural Bilingual Education (DINEIB) and the Indigenous Health Office and social investment in the 200 poorest districts. Acuerdo entre el Gobierno Nacional y las Organizaciones Indígenas, Campesinas y Sociales del Ecuador, at 44 Since 1992, the Modernisation National Council (CONAM) has established an ambitious program to reduce the size of the state, improve, modernise, decentralise and privatise state-owned companies and enhance competition. From 1993 to 1995, eleven state-owned companies were privatised; in 1998, the new constitution allowed for private ownership of strategic sectors (oil, electricity and telecommunications). Despite Noboa s efforts to privatise Andinatel and Pacifictel (telecommunications) and seventeen electricity distribution companies, there was lack of interest from foreign investors, as well as legal problems regarding privatisation procedures. Fander Falconí (et al.), Economía ecuatoriana, (Quito, 2004), pp Noboa s economy minister, Carlos Emanuel, was accused of demanding bribes from local authorities to allocate bigger budgets. Noboa s brothers, Ricardo and Ernesto, were involved in alleged irregularities in the electricity and health sectors, respectively. On leaving office, Noboa sought political asylum in the Dominican Republic after being accused of embezzlement in negotiating the foreign debt. After he returned to Ecuador in 2005, charges were dropped. 46 Gutierrez defeated Alvaro Noboa of the populist PRIAN party that he created for the 2002 presidential race. Gutiérrez and Noboa obtained 20 and 17 per cent, respectively, in the first round. In the second round Gutiérrez received 55 per cent.

9 Crisis Group Latin America Report N 22, 7 August 2007 Page 6 left-wing Popular Democratic Movement (MPD). His ties to the military and their families and background as a man of the eastern lowlands, a historically marginalised region, as well as Pachakutik s strength in the central highlands and the east, were instrumental in his second-round victory. 47 The alliance with Pachakutik unravelled quickly, however, as the president gave priority to good relations with the U.S., the IFIs and Ecuador s bankers, who held the bulk of foreign debt bonds. 48 By August 2003 the indigenous party and the largest indigenous movement organised under the umbrella of CONAIE had severed their alliance with the president, who henceforth tried to survive with arrangements between his minority bloc in Congress and the traditional parties. 49 He also neutralised the indigenous movements by exploiting deep divisions that emerged due to Pachakutik s brief participation in a government that constituents perceived to be working against their interests. On 20 April 2005, Congress toppled the president, once more amid popular protest and with the acquiescence of the high command, though this time the indigenous groups hardly participated. 50 In late 2004 and early 2005, the main opposition to Gutierrez came from heterogeneous and largely urban middle and uppermiddle class sectors in Quito. Citizens protested against the December 2004 decision of the ad hoc coalition Gutierrez engineered with the Social Christian party (PSC) in Congress to form a new Supreme Court. The rationale of the president, who was being strongly challenged by the opposition, including Pachakutik, was to take control of the Court and establish majority PRE representation on it to pave the way for Bucaram s return from exile in Panama. By this he hoped to receive PRE support in fighting impeachment. 51 The forajidos (outlaws), as the protesters proudly called themselves after Gutierrez tried to discredit them with that label, succeeded not only because of their own strength but also because the government was weak and the military withdrew its support. But 47 Democracia liberal, op. cit. 48 Arguably, Gutierrez sacrificed his indigenous alliance to capitalise on first pay-offs of dollarisation and promote economic growth along the IFI lines, Crisis Group interview, Quito, March 2007; Democracia liberal, op. cit., pp Ibid. 50 Like Bucaram and Mahuad, Gutiérrez was ousted on questionable constitutional grounds, since only a simple majority of Congress concluded that he had abandoned his post and so had to be replaced by Vice President Palacio. 51 Bucaram returned to Ecuador but fled first to Peru, then again to Panama after Gutiérrez was ousted in April the movement dissipated as quickly as it had risen, even though its basic premises were carried over into the Correa government. 52 The outsider Gutierrez lost his grasp on power, while enjoying 40 per cent approval and a recovering economy, in large part because he was unable to establish stable alliances in Congress and end executive-legislative confrontation. Other factors were politicisation of key state institutions, persistence of corrupt, clientelistic practices and noninclusion in politics of social and indigenous movements other than the mestizos, mostly in the lowlands, whom the PSP absorbed. 53 Gutierrez also failed to bridge the regional divide (Pacific coast, central highlands, eastern lowlands) or to transform the PSP into a party capable of aggregating interests across the country. The government of Alfredo Palacio took office pledging to found the country anew by a constituent assembly or far-reaching constitutional reforms through referendum but he had no room to manoeuvre. Policies were erratic, the turnover rate of ministers was high, and the executive-legislative stand-off was not resolved. 54 B. THE ECONOMY During the twentieth century, three commodities produced boom and bust cycles: cacao, banana and oil. 55 Shrimp, other fishing products and flowers, among other primary products that make up the lion share of the country s exports, also contributed to growth. Natural disasters, including volcano eruptions (1999), droughts and floods (1975, 1983, 1995, 1998) 52 Crisis Group interview, Bogotá, 23 May In 2004 Welfare Minister Patricio Acosta was removed after the U.S. State Department included him in a list of foreign officials suspected of corruption. On 4 November 2004 a group of PSC, ID, Pachakutik and MPD legislators sought impeachment of Gutiérrez for embezzlement, bribery and jeopardising state security. They claimed he used public funds to finance PSP candidates in the October 2004 local elections and risked national security by requisitioning state transport for the campaign. Congress declined to impeach. Ecuador impeachment drive dropped, BBC News, 10 November For more detail on the Palacio administration and its efforts to introduce constitutional reform, see Ramiro Rivera, Reforma política. Más dudas que certezas (Quito, 2006). 55 The cocoa boom started at the end of the nineteenth century. Banana followed during the first half of the twentieth century and was strongest in the 1950s. Oil was discovered in Oriente province in 1967, and with the completion of the trans-andean Pipeline in 1972, Ecuador was able to begin large-scale petroleum exports. For the rise and fall of oil prices, see Paul Beckerman and Andrés Solimano (eds.), Crisis and Dollarization in Ecuador (Washington DC, 2002), pp

10 Crisis Group Latin America Report N 22, 7 August 2007 Page 7 and earthquakes (1987), disrupted oil production, damaged pipelines, affected agricultural and other exports and discouraged investment. Brief wars with Peru (1981, 1995) further undermined the economic environment. These disasters were exacerbated by political stalemate that translated into a failure to define long-term economic policies, 56 the absence of diversified exports, ineffective industrial development, constant fiscal and budget crises, educational shortcomings and lavish campaign spending. Since the early 1970s, the spread of rent-seeking and corruption stimulated by oil wealth have further contributed to economic problems. Oil revenues grew spectacularly from 1971 to 1974, especially following the opening of the trans-andean pipeline 57 and the government s renegotiation of contract terms with the Texaco-Gulf consortium. The pipeline allowed oil from the Oriente fields in the east, discovered in 1967, to reach market. Although production increases levelled off later in the decade, 58 the large price rise of crude oil in the early 1980s led to a further surge of export revenues until the price collapsed in The March 1987 earthquake interrupted oil exports for five months. While oil revenues were rising, Ecuador began to take on substantial amounts of foreign debt to finance the increased government spending and consequent budget deficits. External debt grew from $328 million in 1972 to $1.26 billion in 1977 and $3.3 billion by It fell as a percentage of GDP from 1970 to 1975 because overall GDP was expanding rapidly but by 1980 it was 52.2 per cent of GDP, over four times the 1975 level. 60 The military governments of the 1970s borrowed heavily abroad to finance current account deficits and big social and development programs but by the time civilians returned to power in 1979, the policies were unsustainable. President Roldós was unable to push through reforms that would have used oil revenues to promote economic development, and in 1981 the World Bank refused to grant another loan. Roldós began to reduce expenditure 56 La trama de Penélope, op. cit., pp The pipeline was opened in Oil export revenues went from $1.2 million in 1971 to $792 million in Production did not start to rise significantly past 1973 s crude oil production of 209,000 barrels per day (bbl/d) until 1983, when it hit 237,000 bbl/d, and continued rising steadily until 1987, when an earthquake severely affected production, dropping the yearly average down to 174,000 bbl/d from 293,000 bbl/d in Stephen Kretzman and Irfan Nooruddin, Drilling into Debt: An Investigation into the relationship between debt and oil, Institute for Public Policy Research and Jubilee USA Network, Wendy Weiss, Debt and Devaluation: The Burden on Ecuador s Popular Class, Latin American Perspectives, vol. 24, no. 4, July and control the current account deficit, including lower gasoline subsidies, higher bus fares and tariff adjustments. This resulted in protests and a national strike. His successor, Oswaldo Hurtado, announced austerity measures and began negotiations with the International Monetary Fund (IMF) to reschedule debt payments. Making things more difficult was the fact that the price of crude oil, in particular the inflation-adjusted price, began to drop steeply in the second half of 1981 after peaking in January. The barrel price fell steadily from $38.85 ($92.29 in July 2007 dollars) in 1981 to $28.80 ($58.44 in July 2007 dollars) in January 1984, a drop in real terms of 37 per cent, while production grew by just 16 per cent from 1980 to The revenue per capita contraction was particularly sharp, as the population grew at 2.7 per cent per year in the first half of the 1980s. Agricultural commodity prices - much of the non-oil export earnings - also declined. Real per capita GDP likewise declined precipitously in the early 1980s. 61 As incomes diminished, Ecuador sought assistance from the IMF for standby loans and to deal with creditors. The IMF recommended that the government devalue the sucre against the dollar, which it did in May 1982 (32 per cent) and March 1983 (21 per cent). This, combined with elimination of subsidies, reduction of protection for import-substitution industries, sales tax increases and reduction in government spending other recommendations contracted the economy by 2.8 per cent in Hurtado s popularity nosedived as economic hardship led to strikes and protests. His successor, León Febres ( ), established a floating exchange rate. The sucre depreciated sharply and other IMF compliance measures, such as reduced import tariffs and removal of export subsidies enabled the refinancing of debt and new loans to deal with the current account deficit. 62 In 1985, external debt reached $8.1 billion. The devaluation also exacerbated economic inequality: the wealthy had begun exchanging sucres in the early 1980s, while the poor had no significant savings to convert. The economic elite benefited from the loans and current account deficits the most, while structural readjustment fell in large part on the backs of the poor, who suffered from inflation, the end of subsidies and stagnant or falling wages. Urban real income declined at 8.7 per cent per year in the 1980s See Appendix B below. 62 The current account deficit fell from $1.182 billion in 1982 to $115 million in 1983; there was a surplus of $76 million by Statistical Abstracts of Latin America, 1992, as contained in Weiss, op. cit.

11 Crisis Group Latin America Report N 22, 7 August 2007 Page 8 There was a further precipitous fall in world oil prices in High quality West Texas Intermediate (WTI) crude, for example, fell from $22.93 per barrel in January to $11.58 per barrel in July. This forced the government to interrupt debt service on foreign commercial loans, and the current account balance went from a small surplus to a large deficit. As the oil price began to rebound in early 1987, the devastating earthquake seriously damaged the main oil pipeline and interrupted oil exports, causing crude oil production for the year to plunge from a 1986 average of 293,000 bbl/d to 174,000 bbl/d. Other economic sectors were also heavily damaged, foreign reserves declined, the economy contracted by 6 per cent, and the currency depreciated further under speculative attacks. The current account deficit ballooned and even after oil exports resumed, the government was unable to pay $8.2 billion on foreign debt, accumulating arrears until Under the presidency of Rodrigo Borja ( ) these arrears grew by $40 million to $50 million per month, so that total debt exceeded annual GDP before the end of his first year. 64 Borja took office stating that it is impossible to meet the necessities of our people and economic development and at the same time pay and service the foreign debt. 65 Negotiations continued on the debt throughout his term but his government rejected several repayment packages. Ecuador continued to pay only 30 per cent of the interest and none of the principal. Meanwhile, living standards for most workers continued to drop in the late 1980s, and total foreign debt reached $11.2 billion by The government s pursuit of economic growth rather than debt repayment did allow real GDP growth to exceed population growth slightly in 1990 and more strongly in 1991 but inflation did not fall much below 50 per cent per year in Borja s term. By the time Sixto Durán Ballén ( ), who pledged to pay the foreign debt according to our possibilities, took office, debt arrears (interest and principle) had reached about $4 billion, with only occasional interest payments. 67 He withdrew from OPEC at the end of 1992, after ending gasoline subsidies a few months earlier, and started to open the petroleum 64 David Brough, Bankers Voice Concern About Debt, Reuters, 17 December Borja Says Foreign Debt Unpayable, Reuters, 10 August After an initial burst back to 320,000 bbl/d in 1988 from 1987 s earthquake-interrupted production, crude oil production remained just under 300,000 bbl/d for three years while the price dropped steadily, lowering revenues. See Appendix B below. 67 Ecuador President Pledges to Pay Foreign Debt, Reuters, 13 November and other sectors to greater foreign investment. Ecuador gained privileged access to the U.S. market in April 1993 through the Andean Trade Preference Act (ATPA). In part because of the reforms that reduced inflation and the fiscal deficit and opened the economy, 68 the country obtained a deal with creditors that reduced the principal owed by 45 per cent and restructured repayment of the remaining debt over 30 years. 69 Although there was macroeconomic recovery, the austerity program led to an increase in poverty levels to 60 per cent. Unemployment reached 15 per cent, with the majority of the economically active population underemployed by Of Ecuador s then 11.2 million people, 3.5 million were estimated to live in total indigence. 71 It was an achievement to reduce the debt by 45 per cent but the country still had to dedicate considerable GDP to debt servicing. The short border war with Peru in produced at least $250 million in unplanned expenses, necessitating new taxes and budget cuts. 73 Matters did not improve in 1995, as drought and lack of maintenance seriously curtailed hydro-electric dams, causing brownouts and rolling blackouts, including in Quito. One bright spot was increased oil production, up to 392,000 bbl/d by 1995, but oil prices remained low, and new foreign operators were responsible for much of the increase, which meant that some profit was repatriated. Bucaram took office in 1996, with inflation at 24 per cent (high but not by recent standards), economic growth at 2 per cent (not enough to exceed population growth) and 45 per cent of the budget used to service foreign debt. 74 Contrary to campaign promises, the president sought to peg the sucre to the dollar. The indigenous movement, trade unions and middle class 68 Key among them the State Modernisation Law of December The original agreement was accepted by the government in May 1994 and agreed to by the over 400 creditors during the year. Ecuador also signed a letter of intent with the IMF in March that formalised and continued its participation in the structural adjustment program. In November 1994 it received a $200 million credit from the World Bank for further reforms as part of the structural adjustment. 70 Ecuador: Poverty Continues to Increase despite Improved Macroeconomic Panorama, Chronicle of Latin American Economic Affairs, 17 November Ibid. 72 See Section II C, below. 73 Antonio Maria Delgado, As War Ends, Ecuador Readies to Defend Economy, Reuters, 16 March This was an initial estimate; some estimates of the cost are much higher. 74 Veto Players, Fickle Institutions and Low-quality Policies: The Policymaking Process in Ecuador ( ), Inter-American Development Bank, May 2006, p. 44.

12 Crisis Group Latin America Report N 22, 7 August 2007 Page 9 took to the streets to protest economic policies, corruption and embezzlement of public funds. 75 When Congress ousted Bucaram, his currency plans were shelved as well. The interim Alarcón presidency was bogged down trying to clean up corruption, relying at times on the army. 76 Shortly after leaving office, Alarcón himself was arrested on corruption charges. By the time Mahuad took over in August 1998, inflation was 36 per cent, growth zero, and the sucre had lost 70 per cent of its value. 77 Constant monetary policy changes did not help: between 1995 and 1999 Ecuador altered exchange rate bands nine times, before floating the sucre. 78 Even though real per capita GDP was fairly constant, 79 the Gini coefficient, an inequality measure, rose from 0.54 to 0.59 from 1995 to El Niño floods in 1998 destroyed many export crops. As falling oil prices and the Brazilian financial crisis caused further deterioration in 1999, Ecuador defaulted on its Brady bonds. 81 The government intervened directly in the financial system, in March imposing a five-day bank holiday and freezing and guaranteeing all deposits to avoid a currency collapse. The 1 per cent transaction fee initiated to raise funds led to massive withdrawal of deposits, a cash economy and closure of a number of small and medium-size banks. The Banco del Progreso, one of the largest measured by deposits, also closed. 82 Government intervention 75 One of the cases was known as the Penaranda network, a ring of officials who provided over-priced equipment to state schools. Seventeen Congressmen were implicated and resigned. Ecuador: who's corrupt now, then?, The Economist, 28 February, Fake foundations were importing second-hand clothing duty-free for victims of the natural disaster produced by El Niño; the clothing disappeared after passing customs. As President Alarcón could neither clean up nor privatise customs because of political infighting, he turned to the army to supervise operations. Ibid. 77 Veto Players, op. cit., p Gustavo Arteta and Osvaldo Hurtado, Political Economy of Ecuador: The Quandary of Governance and Economic Development (Quito, 2002). 79 Real per capita GDP is calculated in Appendix B as nominal per capita GDP in dollars, given market exchange rates at the time, recalculated into 2006 dollars. 80 Ecuador country profile, Pan-American Health Organization website, at 81 The Brady bonds, named after the U.S. Treasury Secretary, were issued in 1989, repackaging loans as bonds, backed generally by the U.S. Treasury. Ecuador defaulted on the U.S. Treasury backed bonds while it still had foreign reserves and was also servicing other debts. See Leaders: Desperation in Ecuador, Economist, 15 January 2000; Finance and economics: A default to order? The Economist, 2 October 1999; and Finance and economics: Latin bondage, Economist, 9 October The banking crisis started in April 1998, with closure of saved sixteen banks, at a cost of over five billion dollars. 83 One third of the Central Bank s reserves evaporated, and monetary deposits fell by almost a quarter. 84 In desperation Mahuad gave up plans for pegging the sucre to the dollar and proposed replacing it with that currency to stop further devaluation and prevent hyperinflation. Removal of the guarantees on bank deposits prompted renewed street protests. The economy contracted by 7.3 per cent in 1999 and about 64 per cent of the population was living in poverty. 85 As the centre piece of its recovery strategy, the successor Noboa government adopted the dollar as the national currency. In March 2000 the Economic Transformation Law established measures to achieve dollarisation, modernise the state, stabilise the economy, build a heavy-crude pipeline and implement the IFI guidelines. 86 Additional initiatives included efforts to increase state revenues and reduce the fiscal deficit. Buoyed by rising oil prices, the economy experienced a modest recovery, with GDP rising 1.9 per cent in 2000, 5.6 per cent in 2001 and 3.5 per cent in 2002, though the trade deficit reached $997 million in Poverty rates, having briefly reached well over 60 per cent at the peak of the crisis, were still near 50 per cent in Since then, both poverty and extreme poverty have dropped steadily, the former to 45 per cent in 2005, a small bank, Solbanco. This triggered panic, causing even larger banks to seek Central Bank support. Small creditors were paid but many larger ones ran after their deposits for years. Luis I. Jacome, The Late 1990s Financial Crisis in Ecuador: Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization at Work, IMF Working Paper # 04/12 (2004), pp An estimated $2.5 billion was transferred abroad. Alberto Acosta, Susana López, and David Villamar, La migración en el Ecuador (Quito, 2006), pp Falling international oil prices and the Latin American, Asian and Russian financial crises undermined Mahuad s economic measures, initially applauded by the IMF and World Bank, such as elimination of subsidies for gas, electricity and diesel, raising the VAT, and taxing all banking transactions. After massive demonstrations, the government retreated. Political Economy of Ecuador, op. cit per cent were living in extreme poverty. Panorama social de América Latina , UN Economic Commission for Latin America and the Caribbean, (Santiago de Chile, 2002), p. 38. According to another source, the cost of the financial crisis may have reached 22 per cent of GDP, as the poverty rate peaked at 69 per cent in Carlos Larrea, Neoliberal Policies and Social Development in Latin America: The case of Ecuador, Congress of Social Sciences and Humanities paper, 2 June Los costos del populismo, op. cit., pp Ibid, pp

13 Crisis Group Latin America Report N 22, 7 August 2007 Page 10 the latter to 17 per cent, though both remain higher than the Latin American average. 88 Inflation decreased from 91 per cent in 2000 to 9.4 per cent in In the budget was balanced, and Ecuador had the highest growth (over 5 per cent) in Latin America, though this mainly only restored the pre-crisis situation. 90 However, since then growth has continued, significantly due to high oil prices, reaching 7.9 per cent in 2004, 4.7 per cent in 2005 and an estimated 4.9 per cent for Oil is a capital, not labour-intensive, industry, so expanding production will not do much for serious un- and under-employment. Insufficient domestic refinery capacity, necessitating import of petroleum products, cuts into potential revenue. 92 Popular protests reduced production by 1.2 million barrels in 2005, costing $50 million. 93 In 2006, PetroEcuador s workers and contractors struck and took over some installations. A 2006 hydrocarbon law that increased the state s take from foreign/private oil companies is expected to bring in $425 million in additional See Social Panorama, 2006, op. cit., Chapter I. 89 However, purchasing power did not increase at the same rates despite a boost from migrant remittances. Los costos del populismo, op. cit., pp The main advantages of dollarisation are the convergence of interest and inflation rates to international levels, the reduction of transaction costs by using the currency of Ecuador s international trade, the general benefits of macroeconomic stability, and the end of currency speculation, capital flight, and political interference in the exchange rate. There are disadvantages as well. Dollarisation is in effect a fixed exchange rate, and a primary import-dependent economy like Ecuador s is vulnerable with a non-competitive exchange rate. Ecuador also no longer has the monetary tools to deal with shocks such as floods, earthquakes and fluctuations in international prices for primary commodities, making adjustment to them more painful. 91 The service and manufacturing sectors, among others, also contributed to the steady growth, Preliminary Overview of the Economies of Latin America and the Caribbean 2006, ECLAC, at Ecuador.pdf. 92 This is made more costly by the fact that Ecuador must import more expensive light products, such as petrol, as it produces an excess of cheaper products, such as fuel oil. In May 2006, during Venezuelan President Chávez s visit, a deal was signed to allow use of Venezuelan refineries to obtain additional product for domestic consumption but implementation has been postponed. 93 Demonstrations Cut Oil Output From Ecuador, The New York Times, 20 August 2005, and Juan Forero, World Business Briefing Americas: Ecuador: PetroEcuador Revives, The New York Times, 23 August Output was still able to exceed that of the previous year only by a small amount. revenue. 94 This law, upheld by the Constitutional Court in August 2006, may make Ecuador significantly less attractive for investors, though high oil prices and lack of countries with more favourable terms may mean there will not be much immediate impact. Confiscation of the assets of Occidental Petroleum in May 2006 has had stronger repercussions. Regardless of the merits of that case, the penalty of losing assets worth over $1 billion (its entire Ecuadorian investment) was widely seen by investors and the U.S. government as excessive. 95 Occidental has since pursued arbitration against the government but President Correa stated his administration does not recognise the authority of World Bank s International Centre for Settlement of Investment Disputes. This also has serious ramifications for the investment climate and Ecuador s bilateral investment treaties, such as the one it has with the U.S. calling for international arbitration to be respected. 96 PetroEcuador, which took over Occidental s operations, has not been able to maintain production, which has fallen by about 30 per cent from 100,000 bbl/d. 97 Free trade agreement (FTA) negotiations with the U.S. were suspended as a result of the Occidental dispute, 98 Those negotiations were, however, already unpopular in Ecuador. In March 2006, President Palacio declared a state of emergency, as thousands, including indigenous groups, paralysed commerce and traffic for ten days 94 Ecuador Wins Key Legal Rulings for New Oil Law, Oxy Seizure, Oil Daily, 25 August Occidental, which won a $75 million international arbitration case over VAT rebates in 2004, was accused of transferring a 40 per cent stake in concessions to EnCana without proper notification to the government. That Occidental was later apparently willing to pay some kind of substantial penalty and the assets EnCana acquired were soon sold to the consortium Chinese Andes Petroleum without problems, despite allegations EnCana also did not get proper permission, have led some observers to suggest the decision was politicised. The Palacio government was under great public pressure to punish Occidental, particularly since it was seen as arrogant for having pursued the VAT case. 96 Leaders: The battle for Latin America's soul, Economist, 20 May More recently, Petrobras has also come under threat of expropriation of assets for alleged violations of its operating contract. It produces about 36,000 bbl/d in Ecuador. Hal Weitzman, Ecuador Threatens Petrobras, Financial Times, 9 July While the Bush administration froze the negotiations in May 2006, as a response to the government intervention against Occidental Petroleum, they were faltering on a number of other issues: copyright, agriculture and investment, among others. US/Ecuador free trade agreement frozen, 14 May 2006, at

14 Crisis Group Latin America Report N 22, 7 August 2007 Page 11 in Quito and surrounding areas in protest. 99 Nevertheless, Ecuador s trade preferences in the U.S. have been extended through February Despite the Occidental case, oil production is still mainly in foreign hands. 101 State-owned PetroEcuador s production has decreased from 120 million barrels in 1994 to 60 million in While in 1995 it produced 81 per cent of the crude oil, ten years later it produced less than 40 per cent. 103 Governments since the early 1990s have tried to attract outside capital, including through privatisation of part of the oil industry. 104 Legislative changes were made to allow different operating service contracts and production-sharing agreements (PSAs). In particular, the reform of the hydrocarbon law in December 1993 and elements of the 1998 constitution attracted foreign companies at a time of low oil prices. The government held bidding rounds that brought companies in to explore and develop new resources, as well as undertake joint ventures with PetroEcuador. Production began to take off in the late 1990s, particularly from Arco, Repsol/YPF, and Occidental. By early 2001, as much as 100,000 bb/d of potential production 99 As a consequence of widespead criticism of the proposed Andean Free Trade Agreement (FTA) in and outside Ecuador, the U.S. shifted to to individual negotiations with Peru and Colombia. See Is the US free trade model losing steam?, American Friends Service Committee, 3 May, 2006 at World Briefing Americas: Ecuador: Government Clamps Down On Protests, The New York Times, 23 March 2006; and World Briefing Americas: Ecuador: Indians Protest Free-Trade Talk With U.S., The New York Times, 16 March See usfederalnews.blogspot.com/2007_07_01_archive. html. 101 Seventeen transnational oil companies are operating in Ecuador, among them U.S., Chinese, Brazilian, Chilean, Canadian and Korean companies. Crisis Group interview, Quito, 8 June Crisis Group interview, mining and energy ministry official, Quito, 8 June The state-owned PetroEcuador was founded in 1989, successor to CEPE (Corporación Estatal Petrolera Ecuatoriana) which was formed in It has become a milk cow for the political elite, and Correa promised during the campaign to end the plunder. Economist, 12 October 2006; Crisis Group interview, mining and energy ministry official, Quito, 11 June Since taking over Occidental s assets, PetroEcuador s share has gone up, initially from about 37 per cent to 46 per cent. 104 This was encouraged by the IFIs: World Bank Helping Ecuador Oil Privatisation Study, Reuters, 6 November was limited by the capacity of the SOTE Pipeline. 105 The Oleoducto de Crudos Pesados (OCP) pipeline, built by a consortium of many of the foreign companies then operating in Ecuador, went online in 2003, boosting their production by about 140,000 bbl/d within months and making them the major producers in the country. PetroEcuador s inefficiency is largely due to insufficient investment and modernisation, as well as politicisation of its management. 106 Since the 1990s, it has had difficulty maintaining production, as falling prices, political unrest, natural disasters and government dependency on oil revenue have left insufficient funds for reinvestment. 107 Even as prices increased in the 2000s, this remained a problem. For example, in 2005 the company identified 157 investment projects that could not move forward, even after increasing its investment budget by 89 per cent, to $338.8 million. 108 In addition, many of its fields are past peak production, with annual decline rates of 3 to 7 per cent. 109 PetroEcuador has labelled the current production situation deplorable and does have a plan, however, for an aggressive drilling program to turn business around. 110 Nevertheless, the 2007 forecast is for a 5 per cent decrease in PetroEcuador s oil production to the lowest level in at least a decade. 111 Although Ecuador has less than 1 per cent of the world s crude oil reserves and of crude trade, 112 the natural resources curse is a menace to any political system as dependent as Ecuador s 105 Peter Gall, Ecuador Heavy Oil Pipeline Deal Ready for Signatures, Energy Minister Teran Says, The Oil Daily, 12 January In the sixteen years of its existence, PetroEcuador has had 22 presidents, Crisis Group interview, mining and energy ministry official, Quito, 11 June Ecuador State Oil Firm Says Needs New Investment, Reuters, 25 February Ecuador: Petroecuador Suffers with Budget Restraints, Diario Expreso, 8 December However, this put the company in the red in In September 2000, then Energy Minister Pablo Terán, when discussing the largest fields, noted that in the last five years investment in fields like these has been almost nil. Wells have been closed for lack of a fuse. This is crazy. Pipe Dreams, LatinFinance, 1 September Ecuador to Begin Aggressive Exploration Program: Oil Official, Platts Commodity News, 9 March PetroEcuador con menor producción de crudo en el 2006, El Universo, 9 January 2007; Crisis Group interview, Quito, 8 June Of course, there was a net gain with the addition of Occidental s assets. 112 Genaro Arriagada, Petropolitics in Latin America, Inter-American Dialogue, 2006, p. 10.

15 Crisis Group Latin America Report N 22, 7 August 2007 Page 12 is on oil, 113 as its recent economic and political history shows. Debt service since 1999 has decreased as total foreign debt has fallen from a peak of over $17 billion in 2004 to $10.4 in The debt service per GDP ratio, 3.6 per cent in 1993 and 10 per cent in , has levelled off at 7-8 per cent. 114 Despite the trend, Standard & Poor rates Ecuador among the least reliable debtors because of constant political upheavals. 115 President Correa has declined cooperation with the IMF economic review and expelled the World Bank representative, as debt payment has increasingly become a political issue. Venezuelan President Hugo Chavez has urged Ecuador to liberate itself from the IFIs and offered help with early repayment. 116 Ecuador has not accepted the Venezuelan offer but is also challenging the World Bank and IMF by questioning again the servicing of its foreign debt. 117 It did pay $135 million on its bonds in February 2007, though some analysts have asserted this was only because it was not yet prepared to default on the debt. 118 C. RELATIONS WITH PERU AND COLOMBIA In territory, population and economy, Ecuador is small compared to neighbouring Colombia and Peru Ecuador fits the basic definition of a resource curse country, one not benefiting economically despite large-scale export of the resource, but it has some unique features. For example, for most of its history, it did not experience Dutch Disease, appreciation of its currency due to commodity export income making manufacturing export industries uncompetitive; instead it had to deal with depreciation after the initial boom. For reporting on resource curse issues, see Crisis Group Africa Report N o 113, Nigeria: Want in the Midst of Plenty, 19 July 2006 and Crisis Group Asia Report N o 133, Central Asia s Energy Risks, 24 May La migración en el Ecuador, op. cit., p Its CCC+ sovereign credit rating is among the lowest among the 113 countries rated, see 116 Luis Oganes and Ben Ramsey, Markets Fret Over Ecuadorean Debt,Viewpoints America, vol. 6, issue, 2, 11 December 2006, p Hal Weitzman, Ecuador Warns of Default on Foreign Debts, Financial Times, 5 July Kenneth S. Levine, Arming for an Ecuador Default, LatinFinance, 1 April The payment has also been associated with corruption allegations. For more on this, see Section III C 2 below. 119 Colombia is roughly four and Peru four and half times the size of Ecuador. Their populations are more then three and two times, respectively, larger than Ecuador s. In 2006, Ecuador s estimated GDP per capita was $4,500. Colombia s and Peru s were $8,600 and $6,600, respectively. Recent troubled relations have origins in the unclear territorial organisation of the Spanish empire and boundary disputes after its secession from Great Colombia in The 1941 war with Peru, settled by the Rio Protocol, 120 cut Ecuador s direct access to the Amazon basin and conceded to Lima approximately 200,000 sq. km. 121 In 1981, two years after returning to democracy, Ecuador fought a brief border war with the old enemy, the Paquisha Incident, over control of three military posts. Increased military presence at the border after the war generated sporadic further violence. 122 President Alberto Fujimori of Peru sought improved relations, in part because of his mounting domestic problems. However, in January 1995 fighting broke out again at the undemarcated border in the Cenepa Valley. It lasted for nineteen days and cost an estimated $1 billion 123 before the guarantors of the Rio Protocol (Argentina, Brazil, Chile and the U.S.) brokered a ceasefire. 124 In 1998, Presidents Fujimori and Mahuad finally signed a comprehensive peace accord, the Brasilia Presidential Act. As a symbolic gesture, one square kilometre at the site of fiercest fighting, Tiwinza, on the Peruvian side, was given to Ecuador as non-sovereign, private property. 125 Both parliaments ratified the agreement, and demarcation started in May Additional agreements were signed, including a binational development plan for the border region. While Ecuador concentrated on its southern border, it long neglected the northern frontier with Colombia. 126 Until the 1998 peace accord with Peru was signed, and spillover from Colombia s intensified civil conflict 120 Brazil, Argentina, Chile and the U.S. brokered and guaranteed the Treaty of Peace, Friendship and Boundaries between Peru and Ecuador, signed on 29 January This meant Ecuador lost almost half its territory. 122 Beth A. Simmons, Territorial Disputes and their Resolution, The Case of Ecuador and Peru, Peaceworks, no. 27 (1999), p It is estimated that 34 Ecuadorian soldiers died and 89 were wounded, while Peru lost 168 dead. Territorial Disputes, op. cit. 124 Military officers of the guarantor nations supervised the ceasefire and separation of troops, which would otherwise have been problematic, given the difficult terrain and lack of communications between the belligerents. 125 Ambassador Luigi Einaudi, the U.S. representative, is credited with the idea. Ecuador can use it for commemorative and other symbolic uses, including flying its flag. 126 Crisis Group Latin America Report N 3, Colombia and its Neighbours: the Tentacles of Instability, 8 April 2003; Crisis Group Latin America Report N 9, Colombia s Borders: The Weak Link In Uribe s Security Policy, 23 September 2004.

16 Crisis Group Latin America Report N 22, 7 August 2007 Page 13 became manifest, only 2,000-4,000 of the country s 60,000 troops were deployed in the north. 127 Quito then sent more troops north and stepped up borderrelated diplomacy. 128 Ecuador is acutely aware of the threat posed by that conflict, including the destabilising impact of trafficking in drugs and contraband precursors. 129 Successive governments have maintained that Ecuador wants no part of the war, and it is Colombia s responsibility to halt the spill-over. 130 Aerial spraying of coca crops along Colombia s southern border, which started with Plan Colombia in 2000, 131 has been a constant source of controversy, and in July 2007 the Correa government decided to file suit against Colombia at the International Court of Justice in The Hague. 132 The presence of Colombian armed groups in Ecuador is a serious concern for both Quito and Bogotá. Nueva Loja, the capital of Sucumbios province bordering Colombia, has for years been a center for medical assistance, rest and equipment for Colombian guerrillas and paramilitaries. 133 In January 2004, Ecuadorian authorities arrested and deported FARC commander Ricardo Palmera, alias Simón Trinidad, who was then extradited to the U.S. While Quito has repeatedly underscored that it played no part in Plan Colombia, it has been willing to cooperate in fighting drugs. 134 In 1999, President Mahuad signed a ten-year agreement with the U.S., creating a Forward Operating Location (FOL) in the Pacific seaport of Manta, which replaced Panama as the centre for U.S. surveillance in the region 135 From there U.S. personnel fly reconnaissance over Colombia, Peru and Bolivia. 127 Seguridades en construcción en América Latina Tomo I. CEPI, Bogotá, 2005, pp. 77, 83; Crisis Group Report, Colombia and its Neighbours, op. cit. 128 Some 11,000 troops are now deployed along the border with Colombia. Crisis Group interview, Quito, 11 June Crisis Group Report, Colombia s Borders, op. cit. 130 Cesar Montúfar, Colombia, desde la mirada ecuatoriana, UN Periódico, no. 102, 20 May 2007, p On the multi-billion dollar U.S.-Colombian strategy to combat drugs and the illegal armed groups in Colombia, see Crisis Group Report N 1, Colombia s Elusive Quest for Peace, 26 March Markus Schultze-Kraft, Una propuesta constructiva, El Tiempo, 9 April 2007; Constanza Vieira, Colombia- Ecuador: Coca Spraying Makes for Toxic Relations, ipsnews, 24 July Montúfar and Whitfield, op. cit., p Crisis Group interview, political analyst, Quito, 28 March Since it was not a treaty, the Ecuadorian Congress could not scrutinize the deal, though it turned to the Supreme Court, which upheld the accord. The New York Times, 31 December In 2005, a law defined money laundering as a criminal activity and foresaw establishment of a financial intelligence unit. The increased policing has produced results. Between 1999 and 2003 the authorities seized an average of eight tons of cocaine. This increased to 44 tons in In the first quarter of 2006, eleven tons were seized during Operation Pacific Storm, which dismantled a major trafficking organisation. 136 Ecuador has received the major inflow of Colombian refugees and numbers are rising. During the 1990s, applications averaged 60 a year. 137 Between 2000 and 2006, more than 40,000 Colombians officially asked for refugee status, 72 per cent of all applications in neighbouring countries. 138 However, most refugees and migrants in Ecuador are not registered and live illegally. The authorities estimate there may be 500,000 Colombian citizens in the country. 139 The increase in numbers of illegals has become an issue of public concern. According to a 2006 poll, 74 per cent of Ecuadorians were against Colombian immigration; 35 per cent favoured deporting illegal Colombian migrants. 140 The new government is considering massive legalisation of the migrants. In the midst of a diplomatic row with Bogotá over aerial spraying of coca crops on Colombia s southern border, the Correa administration launched Plan Ecuador and earmarked $145 million for it in It aims, in part in collaboration with Colombia, at controlling the spillover effects of the neighbour s conflict by fostering infrastructure and socio-economic development, environmental protection and human rights in border municipalities. Its timeframe is through 2018, and the government seeks substantial donor help. Colombia has so far shown little interest, however, since it is perceived as a counter to Plan Colombia. 136 International Narcotics Control Strategy Report, U.S. Department of State, 2006, p Consuelo Beltrán, Álvaro Moreno, Javier Sánchez (et al.), El desplazamiento forzado de colombianos hacia Ecuador en el contexto del Plan Colombia (Bogotá, 2004), p Más o menos desplazados, CODHES, September 2006, p Ecuador aplaza lanzamiento de su contraofensiva diplomática al Plan Colombia, El Mercurio, 8 April Ecuador: 74% de la población contra inmigración colombiana, La Hora, 4 September 2006.

17 Crisis Group Latin America Report N 22, 7 August 2007 Page 14 III. THE CORREA ADMINISTRATION A. THE 2006 ELECTIONS On 26 November 2006, Rafael Correa defeated Alvaro Noboa in the second round of the presidential election. The candidate of the left-wing Alianza País (AP) 141 won 57 per cent of the vote, shattering the hopes of the multimillionaire, three-time candidate and leader of the populist Partido Renovación Institucional Avanzada Nacional (PRIAN), who led the first round and has still not acknowledged the result. 142 Reversing the belligerence that marked his campaign, in particular during the first round, Correa struck a conciliatory note, saying there were no winners and losers, but also that he represented the eagerness for change after years of darkness. 143 Several factors played a role in Correa s victory in a campaign marked by apathy and uncertainty. 144 The outgoing Palacio administration had failed to produce promised constitutional reforms and stability. In the early days of the campaign, the candidates were acutely aware of the difficulties they would face in living up to their pledges. Executive legislative stand-offs and fragmentation within the latter had been constants during the two previous administrations. 145 Political parties and Congress alike were discredited. Surveys 141 Alianza País was founded in 2005 by Rafael Correa and left-leaning intellectuals, including Gustavo Larrea, Alberto Acosta, Ricardo Patiño, Vinicio Alvarado and Manuela Gallegos. It has incorporated a growing number of leftist political and social organisations and movements, such as Acción Democrática Nacional, Iniciativa Ciudadana, Movimiento Ciudadano por la Nueva Democracia, Ciudadanos Nuevo País and Alternativa Democrática. Crisis Group interview, political analyst, Quito, 8 June Crisis Group interview, leading PRE member, Guayaquil, 12 June In 1998 and 2002, Noboa made it to the second round, standing against Jamil Mahuad and Lucio Gutiérrez, respectively. On both occasions, he was second in the first round and lost by relatively small margins in the second (49/51 per cent in 1998, and 46/54 per cent in 2002). Noboa won 27 per cent of the vote and Correa 23 per cent in the first round on 15 October Gilmar Gutiérrez of the Sociedad Patriótica (PSP) party and brother of former President Lucio Gutiérrez was third with 17 per cent. 143 First speech of the newly elected president, available at 144 See Vanguardia, August-November Crisis Group interview, political analyst, Quito, 26 March conducted at the beginning of the campaign in August showed 75 to 80 per cent of the voters were undecided. 146 After an attempt to build a minimum common platform (concertación) between the parties failed, 147 León Roldós, who was backed by the Red Etica y Democracia (RED) and social-democratic Izquierda Democrática (ID), and Noboa were the early leaders. Correa, who was also supported by the small Partido Socialista- Frente Amplio (PS-FA), was given little chance, as were Cynthia Viteri of the conservative Partido Social Cristiano (PSC), who was hampered by party infighting; 148 Gilmar Gutierrez of the populist Partido Sociedad Patriótica (PSP), brother of the former president; and Luis Macas of the indigenous, leftist Movimiento de Unidad Plurinacional Pachakutik-Nuevo País (MUPP-NP). An alliance between PRIAN, Partido Roldosita Ecuatoriano (PRE) and PSP did not materialise. In one way or another, all candidates advocated deep reforms; the dividing line was whether these should be brought about by a constituent assembly (Roldós, Correa, Gutiérrez and Macas), or Congress (Noboa and Viteri). Correa s chance came when Roldós, who was competing for the same voters on the left, became tangled in the ambiguities of his promises and unwisely approached business sectors in an attempt to emulate the Chilean model of economic growth and social equity. 149 Correa capitalised on his image as an anti-party outsider, campaigning with strong nationalist overtones including promises to overhaul the political system in the constituent assembly (CA) and attacking an FTA with the U.S. and the U.S. military base (FOL) in Manta. As part of a strategy to delegitimise Congress that ultimately failed, AP offered no parliamentary candidates Vanguardia, August The common agenda and platform was promoted by the leader of the Nuevo País party, Freddy Ehlers, and supported by Quito and Guayaquil Mayors Oswaldo Moncayo (ID) and Jaime Nebot (PSC), respectively. It aimed at establishment of a transition government capable of guiding Ecuador out of its political and institutional quagmire. Vanguardia, 8-14 August The PSC was split between its long-time strongman and former President León Febres Cordero and Mayor Jaime Nebot of Guayaquil. The candidate, Cynthia Viteri, basically had to campaign without party backing. Crisis Group interview, ex-presidential candidate, Guayaquil, 12 June Crisis Group interview, RED legislator, Guayaquil, 11 June The strategy, known as voto nulo, did well only in the central highland province of Pichincha, where 33 per cent voted nil.

18 Crisis Group Latin America Report N 22, 7 August 2007 Page 15 Noboa sought confrontation with Correa, calling him a communist, 151 and made populist campaign pledges, including to build 300,000 houses for the poor yearly. He also stepped up his campaign for facilitating foreign investment and making the market work. This was effective in the first round and prompted AP and Correa first to cry foul and denounce fraud, then to make significant adjustments for the second round, including jettisoning the outsider image for a more moderate one. Instead of focusing on the CA, the FTA and the Manta base, he lowered his belligerence and promised to increase social spending, reduce value added tax and give entrepreneurs cheap credit. 152 He also distanced himself from Venezuela s Chávez, whose public support had cost him first-round votes. In the runoff, Correa gained the better part of the centreleft and indigenous vote as well as much of the support that had gone to Gutíerrez. 153 Noboa led only in the PRIAN and PRE strongholds in the coastal provinces of Guayas and Manabí. Correa s victory over the banana magnate was based not so much on alliances with other parties as Ecuadorians unwillingness to put Noboa in the Carondelet palace. 154 The AP strategy of not presenting Congressional candidates helped by underscoring Correa s determination to break with the past of congressional inefficiency and corruption but also prepared the ground for the virulent confrontation with an opposition legislature that marked the first months of the new administration. 151 During the televised debate broadcasted by CNN en Español on 5 October 2006, Noboa used Correa s friendship with Hugo Chávez and Fidel Castro as well as his hesitation to refer to the FARC as a terrorist group to portray him as a communist and a friend of Colombia s largest insurgent group. 152 Correa also repeatedly criticised Noboa for using child labour on his banana plantations. 153 Gutierrez won a surprising 17 per cent in the first round, mainly in the Amazon lowlands, as well as on the coast and in the central highlands. Other first-round losers whose supporters generally migrated to Correa included Roldós (15 per cent), Viteri (just under 10 per cent) and Macas (just over 2 per cent). Gutierrez and the PSP had campaigned strongly at the community level in the eastern lowlands and El Oro, Los Ríos, Manabí, Pichincha and Azuay provinces in the central highlands and the coast. One of his tactics was to hand out tools to small farmers. Crisis Group interview, political analyst, Quito, 26 March Hernán Ibarra, La Victoria de Rafael Correa y la ola progresista en América del Sur, Ecuador Debate, no. 69 (2006), p. 18. B. THE NEW GOVERNMENT S PEOPLE AND PROGRAM Judging by the professional and political background of its members, the new government exhibits some features that distinguish it from its predecessors. The president and several key ministers are in their 40s, with considerable social science expertise but little or no political party or governmental experience. Until his five months as economy minister at the start of Palacio s term, Correa was little known in political circles and social movements. After earning his MA in economics at the Catholic University of Louvain-la-Neuve in Belgium in 1991, he worked as economics professor at the prestigious San Francisco University in Quito. In 2001, he earned his Ph.D. from the University of Illinois (U.S.). His academic work exhibits deep interest in macro-economics, monetarism, social justice, poverty reduction and national sovereignty. 155 According to academic sources in Quito, he is on the Left but not a Marxist. 156 Alluding to a Catholic upbringing, Correa has referred to himself as a Christian on the Left. Ricardo Patiño, Correa s first economy minister, 157 and Fander Falconi, the national secretary for planning and development, worked for years in left-leaning research institutions in Quito, such as the Facultad Latinoamericana de Ciencias Sociales (FLACSO) and the Instituto Latinoamericano de Investigaciónes Sociales (ILDIS) funded by the German Social Democratic Party. So did Alberto Acosta, the energy and mining minister until he resigned to stand for the CA. Before joining the cabinet, Foreign Minister María Espinosa and Interior Minister Gustavo Larrea headed the Unión Internacional para la Conservación de la Naturaleza (UICN) in South America and the Latin American Association of Human Rights (ALDHU) in the Andean region, respectively. 158 The internal and external security minister, Fernando Bustamante, was a political science professor at San Francisco University in Quito. Close links between academe and the cabinet persist, with the former 155 See his La vulnerabilidad de la economía ecuatoriana: hacia una mejor política económica para la generación de empleo, reducción de la pobreza y desigualdad (Quito, 2004); and Ecuador: de absurdos dolarizaciones a uniones monetarias, in Rafael Quintero & Erika Silva, (eds.), Hacia un modelo alternative de desarrollo histórico (Quito, 2005), pp Crisis Group interviews, Quito, March After being censured by Congress (see Section III.C.2 below), Patiño was replaced by Fausto Ortíz in July He is now minister for the Pacific coast (Ministro Coordinador del Litoral). 158 Larrea, older than most of his colleagues, was under secretary at the interior ministry under President Bucaram,

19 Crisis Group Latin America Report N 22, 7 August 2007 Page 16 acting as a sounding board for the latter s ideas. 159 The same is true for a number of political and social organisations and movements and NGOs. Another distinctive feature is participation of several members, including Correa, in the forajido movement that took an important part in ousting Gutierrez in Correa s themes of ending the power of the political mafias, cleaning up the discredited Congress, courts and state institutions, enhancing citizen participation in politics and producing a citizen revolution (revolución ciudadana) have roots in the protest movement of Since its creation in late 2005, AP has defined itself as a progressive movement emphasising citizen participation, social equity, ethical politics, cultural and social diversity and solidarity among citizens. According to an official, it includes or is supported by more than 200 social organisations and left-wing parties, such as Democratic Alternative (AD), the Socialist Party (PS-FA) and the Popular Democratic Movement (MPD). 161 Correa s campaign program, which is being worked into a national development plan with the participation of citizens and social organisations, 162 featured some classic socialist and social democratic elements, such as enhancement of the state s role in the economy and extensive social welfare. The CA is seen as the first step toward building a new social pact and far-reaching institutional, political and economic reforms. 163 Since his days as a professor, Correa has been a harsh critic of neo-liberal economic policies. Instead of following IFI recipes as most of his predecessors since 1979 have attempted, he has been emphasising a stronger state role in the economy to achieve development and social equity. Increased public investment is planned in agriculture, telecommunications and energy, particularly in refining so as to reduce dependence on imports of crude oil derivatives. While the issue has not been addressed explicitly, he and the AP have not ruled out nationalisation of key sectors. Social issues, including creation of quality jobs and investment in education and universal health coverage, are at the centre of Correa s project. Women are targeted by reforms to enhance gender equality and 159 Crisis Group interview, political analyst, Quito, 27 March Crisis Group interview, political analyst, Quito, 26 March See section II.A above. 161 Crisis Group interview, internal and external security ministry official, Quito, 11 June Crisis Group interview, national planning agency official, Quito, 8 June See section III.C below. economic autonomy. 164 The project also advocates public policies that take into account multiculturalism and indigenous peoples and improve social cohesion among the poor majority. 165 The remittances of more than one million Ecuadorians abroad 166 (out of what is now a population of 13.8 million) are 7 per cent of annual GDP. 167 Correa has pledged to defend Ecuadorian migrants rights and create conditions at home that would encourage them to return. Although Correa has not sought confrontation with the U.S., he has said he will not renew the military base at Manta. 168 He has reaffirmed neutrality in the Colombian conflict and enthusiastically promotes Latin American integration, even using some of Hugo Chávez s Bolivarian sovereignty rhetoric. 169 C. POLITICAL STRUGGLE AND THE CONSTITUENT ASSEMBLY With the 15 April 2007 referendum on the CA, Correa moved a step closer to fulfilling his main campaign promise and political goal: profound institutional, political and economic change through rewriting the constitution. The yes vote was 82 per cent, turnout 71 per cent. The OAS Electoral Observation Mission, led by former 164 Women s associations actively participated in developing Cornea s campaign program. Plan de gobierno del Movimiento PAIS : un primer gran paso para la transformación radical del Ecuador, Alianza País, 2006, pp For instance, study of indigenous languages is to be encouraged, ibid, p. 9. Correa pledged to double the Human Development Bond for keeping children at school and the Housing Bond; lower bank interest rates and issue cheap credit for productive sectors, including 555, a micro-credit plan mainly targeting women and youth (granted by the Banco Nacional de Fomento, the credits can be up to $5,000 for five years at five per cent); and prepare a law for restructuring the social security system. 166 Official figures for 2005 are 436,000 in the U.S., 487,000 in Spain and 62,000 in Italy. Estimates for these three countries are close to 1.3 million. See Brad Jokisch, Ecuador: Las cifras de la migración nacional, at 167 According to the Foundation for International Migration and Development, the remittances were 7.02 per cent of GDP in 2006, at 168 Crisis Group interview, U.S. embassy official, Quito, 30 March Plan de gobierno del Movimiento PAIS , op. cit., p. 9.

20 Crisis Group Latin America Report N 22, 7 August 2007 Page 17 Chilean Interior Minister Enrique Correa, found no major irregularities. 170 This victory was preceded by one of the nastiest political episodes since the 1979 return to democracy, involving the executive, Congress and the judiciary. The essence of Correa s shock therapy has been fighting the opposition-dominated legislature and holding the CA referendum. 171 His initial signals of seeking rapprochement with the traditional parties faded quickly. 172 All sides resorted to constitutionally and legally questionable actions in the referendum fight, further undermining the already weak rule of law. 173 In the course of a struggle in which law and the constitution were constantly invoked, Ecuador s legal and normative framework, as an analyst aptly put it, was reduced to jelly. 174 Sectors close to the government, including the leftist MPD, which has three seats in Congress, staged occasionally violent protest marches against the corrupt political mafias said to control Congress and key state institutions. 175 Provoked by the opposition s intransigence and determination to use any means available to stop the CA, Correa also used highly confrontational language in the lead up to the referendum, while only vaguely defining what the new constitution should look like. In hindsight, it is clear the Congress did not realise how low its public standing was and mistakenly believed it could continue with politics as usual. It also underestimated the president s astuteness and the strength he derived from his election and approval rating, which was 73 per cent on taking office and still at 62 per cent in June, dropping slightly to 59 per cent in July. 176 In its first Para la OEA el proceso electoral fue transparente y sin anomalias, El Universo, 16 April Misión de Observación Electoral Consulta Popular. República de Ecuador: Informe Verbal del Jefe de Misión, Dr. Enrique Correa, OEA/OAS, 9 May Correa s motto in his struggle with the opposition in Congress has been described as I had better oust Congress before it ousts me. Crisis Group interview, political analyst, Quito, 26 March Vanguardia, no. 66, 26 December January Crisis Group interview, Quito, political analyst, 27 March Crisis Group interview, Quito, political analyst, 28 March Crisis Group interview, Quito, leading member of MPD party, 11 June Crisis Group interview, political analyst, Quito, 28 March Correa s approval rating dropped slightly, to 69 per cent, in mid-march and rose in late April to 76 per cent. Cedatos-Gallup, 24 April 2007, Cien días entre emergencias y consulta, La Hora, 24 April 2007; Popularidad de Rafael Correa se ubica en 59%, El days, the new government gained control of all key institutions, including Congress, the Constitutional Court (TC) and the Electoral Tribunal (TSE). The means employed, while questionable from a constitutional perspective, 177 are defended by officials as legitimate in the circumstances, including opposition plotting Applying shock therapy Correa made clear from the start that he would not compromise his main goal of establishing the CA. During his first ten weeks, he struggled relentlessly against the opposition majority in Congress and its representatives in key state institutions, such as the Electoral Court (TSE), that was determined to block the initiative. He quickly issued Presidential Decree no. 2 for an 18 March 2007 referendum on establishment of the CA. This constitutionally questionable procedure 179 was followed, a week later, by Decree no. 54 modifying the CA rules set out in the first decree. 180 The seven-member TSE, including four from opposition parties, 181 ruled the referendum required Congress approval. This sparked a round of street protests, allegedly backed by the president, aimed at putting pressure on the legislative branch. 182 Comercio, 2 August Other polls show that 44 per cent say the country is better off than before the election and 73 per cent that it is going the right way. Cien primeros días de gestión, El Mercurio, 25 April For May (67 per cent) and June approval figures, see Cedatos/Gallup poll, 16 June See below. 178 Crisis Group interview, ministry of internal and external security official, Quito, 8 June Correa based his decision to call a referendum by decree on Articles and of the constitution, which say the president can call a consulta popular when he believes the issues involved are of vital national importance. However, Articles and specify that these issues should not include reform of the constitution. For that, Article 283 would seem to apply. It states that the president can call for a referendum on a constitutional reform only if a majority of Congress has qualified the reform as urgent. Constitución política de la república de ecuador de 1998 ; Crisis Group interview, political analyst, Quito, 11 June Presidential Decree no. 54, 23 January 2007, at 181 TSE members are Jorge Acosta (PSP, president); Andrés Luque (PRIAN); Pedro Valverde (PSC); Andrés León (UDC); René Maugé (ID); Hernán Rivandeneira (PS-FA); and Elsa Bucaram (PRE). 182 To pressure Congress to approve the referendum, street protestors even broke into the Congress building after legislators had abandoned it on 30 January 2007.

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